High Quality Dividend Stocks, Long-Term Plan

Forget Netflix, Buy These 4 Dividend Growth Stocks Instead

Netflix (NFLX) stock rose 10% after the company’s July 17th earnings report, as the Internet streaming service added more than 5 million subscribers last quarter.

Consumers are cutting the cord, and Netflix has taken full advantage. Its share price has rocketed as a result.

Consider that, on July 20th, 2012, Netflix stock closed at $11.69 per share. Five years later to the day, the stock closed at $183.60.

Netflix is riding the cord-cutting wave. But now is not the time to jump on board.

Netflix’s underlying business model is questionable. The company is racking up millions of new subscribers, but needs to spend huge amounts of money to do so. Its bottom line has little to show for its impressive subscriber growth.

Today, Netflix shares trade for a valuation that should make value investors queasy.

And, there is little chance Netflix will pay a dividend any time soon, which makes it unappealing for income investors as well.

For value and income investors, the following four media dividend growth stocks are much better options than Netflix.

Media Dividend Stock #1: AT&T (T)

Dividend Yield: 5.4%

Price-to-Earnings Ratio: 12.8

AT&T is an obvious choice for dividend growth investors, because of its long history of steady dividend increases. It has raised its dividend for 33 years in a row.

Most investors know AT&T as a telecom giant. But it will soon become a major player in the media industry as well, assuming its massive acquisition of Time Warner (TWX) receives regulatory approval.

AT&T and Time Warner have come to a definitive agreement to merge, in a $108.7 billion deal, including Time Warner’s debt.

The acquisition will present a host of growth opportunities for AT&T. It will also diversify AT&T’s services, by giving the company a huge presence in content. Time Warner is a media giant, with cable properties including TNT, TBS, and CNN, along with premium channels HBO and Cinemax.

Time Warner’s premium networks alone have nearly 50 million subscribers. Time Warner also owns the Warner Bros. movie studio.

Combined, AT&T would have more than 140 million mobile customers, and 45 million video subscribers, around the world.

The acquisition could also help AT&T leverage its existing services. With Time Warner in tow, AT&T will be able to deliver content to its more than 100 million customers on every screen. Furthermore, owning content could give AT&T additional bargaining power with advertisers.

As a result, AT&T could see new growth not just from adding subscribers, but from advertising as well.

AT&T has a very attractive dividend yield of 5.4%. It can afford to pay its generous dividend, because the company is a cash cow.

Revenue declined 3% for the quarter, versus the same quarter last year, but earnings-per-share increased by 3%. Operating margin expanded by 80 basis points from the same quarter last year.

The revenue dip was due largely to weak equipment sales, including phones. However, the long-term growth story remains intact for AT&T.

For 2017, AT&T expects full-year adjusted earnings-per-share to increase in the mid-single digits.

Free cash flow is expected to grow 7%, to $18 billion, which would be more than enough for the company to raise its dividend again in 2017, and beyond.

Media Dividend Stock #2: Walt Disney Co. (DIS)

Dividend Yield: 1.5%

Price-to-Earnings Ratio: 18.7

There is arguably no company more pressured by cord-cutting, than Disney. Disney’s flagship cable property ESPN, is in trouble, as consumers ditch cable in favor of streaming options like Netflix.

Operating profit in Disney’s cable networks business fell 6% over the first six months of fiscal 2017.

ESPN still has a critical advantage over streaming services: live sports. Netflix has a huge library of content, but it does not offer live sports.

It stands to reason ESPN could reclaim some of the subscribers it lost, if it expands its live sports offerings, and cuts back on its other programming that clearly fell out of favor with consumers.

Disney’s decision in April to lay off roughly 100 anchors and other on-air talent may be an indication that the company is embracing this strategy.

Even with ESPN’s troubles, Disney is highly profitable and growing, with several world-class franchises.

Disney climbed to the #7 spot on Forbes’ 2017 list of the world’s most valuable brands, overtaking Toyota (TOYOF).

According to Forbes, Disney’s brand is worth $43.9 billion, up 11% from last year.

Disney still has plenty of growth opportunities across its other businesses, particularly in theme parks and studio entertainment.

The two businesses generated more than $26 billion revenue last year, and together account for nearly half of Disney’s total revenue. Disney’s earnings-per-share increased 12% in 2016, to a record $5.73.

Parks and Resorts revenue increased 8% over the first half of fiscal 2017, and there should be even more growth up ahead, because of the new Disney Shanghai resort.

Shanghai Disney cost more than $5 billion to build, but it will be worth it. According to Disney, more than 300 million people live within three hours of the park.

Disney expects the park to break even in 2018, and so far, it has performed above expectations. Disney CFO Christine McCarthy stated at a recent industry conference that Disney Shanghai was profitable in two out of the past three quarters.

Revenue dipped 5% over the first two quarters of fiscal 2017, but only because the movie studio faced extremely difficult comparisons from last year.

Disney owns multiple hugely successful movie franchises, including Lucasfilm, Marvel, and Pixar. There will no doubt be several more blockbusters for years to come.

Disney has a relatively low dividend yield, of 1.5%. This might be fairly unappealing for income investors, who may desire higher dividend yields.

But Disney’s real value will be as a dividend growth stock going forward.

Disney held its dividend steady in 2008 and 2009, during the Great Recession. That said, it has increased its dividend each year since, and at very high rates. Over the past five years, Disney’s annualized dividends have increased at a 16% compound annual rate.

If the company can continue to increase its dividend by 16% per year going forward, its dividend payment will double every 4.5 years.

There should be no reason why the company cannot reach the Dividend Achievers. It is not a stretch to think that Disney will become a Dividend Aristocrat in time.

Media Dividend Stock #3: Comcast (CMCSA)

Dividend Yield: 1.6%

Price-to-Earnings Ratio: 20.7

Comcast has aggressively pursued media in recent years, highlighted by the company’s 2013 acquisition of the 49% of NBCUniversal it didn’t already own.

Comcast spent $16.7 billion to purchase NBCUniversal, but it wasn’t finished there: Comcast acquired Dreamworks in 2016, for $3.8 billion. The company’s annual revenue is now split 60-40 between its cable business, and media business.

Comcast’s core cable segment is performing well. Revenue increased 7% in 2016, thanks to 9% growth in Internet service revenue. This is one area in which Netflix will not hurt Comcast—even if consumers cut the cord, they still need broadband.

The company performed even better in the first quarter. If cord-cutting is supposed to be a death knell for cable companies, someone forgot to tell Comcast. Revenue and earnings-per-share increased 9% and 23%, respectively, year over year.

The cable segment racked up 297,000 new customers last quarter, and increased revenue per customer by 3% for the first quarter.

The first quarter was equally impressive. Revenue, adjusted for an extra NFL playoff game in the 2016 first quarter, rose in the high-single digits. Adjusted earnings-per-share hit another record for CBS, up 9% year over year.

CBS has taken steps to insulate itself from the competitive threats of online streaming. It recently came to an agreement with Hulu, one of Netflix’s biggest competitors, to carry CBS programming through Hulu’s new live TV streaming service.

It has also divested under-performing business segments. The company recently announced it will divest its radio business in a tax-free transaction. The transaction will allow CBS to allocate resources to its higher-growing segments, which are its most important areas to focus on going forward.

CBS has a below-average dividend yield, but it makes up for this with strong dividend growth. Last year, CBS increased its dividend by 20%.

CBS has a current annualized dividend payout of $0.72 per share, which is well-covered by underlying profits. The dividend payout ratio, based on 2016 results, is just 18%.

Distributing less than 20% of annual earnings leaves plenty of room for 10%-15% dividend growth each year, moving forward.

Final Thoughts

Netflix is an exciting momentum stock, but the reality is, the company is barely profitable.

The company grew revenue by 30% in 2016, to $8.8 billion, but earnings-per-share were just $0.43. Because of its razor-thin profit margins, Netflix stock trades for a price-to-earnings ratio of 427.

The stock is not likely to be a rewarding investment going forward, even if it grows earnings at a high rate, because its valuation is dangerously high.

Many tech stocks behaved similarly during the late 1990s.

They grew revenue at a high rate, but it was not profitable growth. This led to the infamous tech bubble, and the ensuing busting of that bubble caused many tech stocks to be “dead money” over the next 10 years.

Netflix could see a similar fate. As a result, investors would be better served focusing on these four profitable media stocks, all with modest valuations and strong dividend growth.

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